Retail investors have pumped in an additional Sh229.2 billion into government securities over the last six months, highlighting the allure of the higher interest rates on offer and reduced investment in opening new businesses due to a difficult economic climate.

In parking their funds in government bonds, the investors have also been able to shield their funds from inflationary erosion.

Latest government debt data from the Central Bank of Kenya (CBK) shows that retail investors who are classified as ‘other investors’ raised their share of the government’s domestic debt to 11.38 percent by the end of last week. This is the equivalent of Sh573.7 billion, with the State’s domestic debt standing at Sh5.04 trillion as at January 12.

At the end of June 2023, these investors— who include Saccos, listed and private companies, self-help groups, educational institutions, religious institutions, and individuals— held 7.13 percent or Sh344.5 billion of the government’s domestic debt, which stood at Sh4.83 trillion at the time.

The turn to bonds is indicative of the state of the economy and is also a result of rising awareness among retail investors of bond investments in the face of reduced returns in alternative asset classes.

Bonds issued since June have paid progressively higher interest rates, with the recently sold January 2024 offer paying investors 18.4 percent and 18.8 percent on its two tranches of three and five years respectively.

On the other hand, alternative asset classes such as equities have offered much lower returns over the period. The Nairobi Securities Exchange (NSE) for instance has shed 12.8 percent or Sh213.4 billion in market capitalisation since June 30, 2023.

For more sophisticated investors such as banks and pension funds, the attractiveness of the rates on bonds has been dampened by the resultant fall in secondary market prices of these securities, with their holdings being reported at present value on their balance sheets.

Bond prices and yields in the secondary market move in opposite to each other, where a rise in yields would result in the devaluation of bonds and vice versa. These paper losses do not translate to actual losses, however, unless the securities are liquidated.

Pension funds have, therefore, cut their holdings of government debt in real terms by Sh104 billion since the end of June last year, while banks’ holdings have only gone up by Sh83 billion despite the institutions being the biggest lenders to the government.

The CBK data shows that pension funds’ share of government domestic debt stood at 29.97 percent by the end of last week, equivalent to Sh1.51 trillion, while in June last year, their share was 33.42 percent, or Sh1.614 trillion.

The funds have been disadvantaged by the issuance of short-dated bonds in the period, which goes against their preference of longer-dated paper. This fall is an indicator that they are not rolling over maturities, but are rather parking the funds in fixed deposit accounts.

For banks, the share in percentage terms has reduced from 46.17 percent to 45.92 percent since June, even though the nominal value has risen by Sh83.9 billion to Sh2.314 trillion owing to the outright growth in public debt in the period.

Insurance firms have also seen their share of the debt fall from 7.31 percent to 7.24 percent, although similar to banks, their absolute holdings have gone up by Sh11.8 billion to Sh364.99 billion.

Parastatals have also cut their exposure by half a percentage point to 5.48 percent, with their holdings in nominal terms falling by Sh12.7 billion to Sh276.3 billion.